Revenue NSW responds to aggregator payroll tax alarm

The comments come after aggregators voiced alarm at assessments from Revenue NSW advising that they are liable to pay tens of millions of dollars in backdated payroll tax. 

Indeed, Revenue NSW’s assessment of the aggregator and broker relationship has been disputed by several members of industry and is currently the source of a legal contest brought against Revenue NSW by Loan Market Group.

In a comment to The Adviser, a Revenue NSW spokesperson said: “Mortgage aggregators may have a payroll tax liability under the contractor provisions of the Payroll Tax Act 2007 (the Act). Where the contractor provisions apply, commissions and certain other payments may attract a liability to payroll tax...

“While Revenue NSW does undertake compliance activities, it is not conducting a targeted compliance program on mortgage aggregators to pursue backdated tax at this time.”

It emphasised that businesses are required to register for payroll tax when their total Australian wages are above the NSW payroll tax threshold. The payroll tax rate for the financial year 2022/23 is 5.45 per cent of taxable wages above the threshold of $1.2 million.   

Where it is estimated a customer will be liable for more than $20,000 for the financial year, they are required to pay monthly. For customers with an expected liability of less than $20,000 for the financial year, they can pay annually. 

“Payroll tax is a self-assessed tax,” they said.

“Revenue NSW conducts regular compliance reviews of payroll tax customers to ensure they are paying the correct amount of payroll tax.  

“At the finalisation of a compliance review, customers are provided with detailed explanations about any liabilities discovered and details on how the legislation applies to their business.

“Compliance reviews analyse customer records for the current financial year, plus the previous four financial years. 

“Where Revenue NSW identifies a customer has not been paying the correct tax, an assessment will be issued for the relevant period.”

It added that payment is due within 21 days from the date of the assessment.

Determining the aggregator-broker relationship 

While the treatment of payroll tax has been contended for some time in the broking industry, things have been heating up recently.

Following queries from the broking industry, Cullen Smythe, the commissioner of State Revenue at Revenue NSW, last year issued a notice to businesses providing credit services under an Australian Credit Licence (ACL) and financial services under an Australian Financial Services Licence (AFSL). 

In the notice, he set out in detail how the office applies payroll tax to the application of the relevant contract provisions under s32 of the Payroll Tax Act 2007 (the Act).

Revenue NSW outlined that payments of commission or other forms of remuneration by entities that hold an AFS licence or an ACL — such as payments by aggregators to their ‘agents’ (i.e. brokers) — may be liable for payroll tax if they are deemed to form part of a ‘relevant contract’.

For example, it flagged that this may apply to contracts between an aggregator and their authorised credit representatives (brokers).

If Revenue NSW assesses the broker to have a relevant contract, then the aggregator is taken to be an employer, the ‘agent’ (i.e. broker) is taken to be an employee, and their remuneration (i.e. upfront and trail commissions) is taken to be wages.

The commissioner flagged that, under s.33(1) of the Act, a person who supplies services or is supplied with services under a relevant contract is taken to be an employer.

“An AFS Licensee or an AC Licensee (including an aggregator) who is supplied with services, and also supplies services under a contract with an agent is therefore taken to be an employer,” he wrote. 

As such, the licensee may be liable for payroll tax. 

Commissioner does not accept aggregator ‘misconceptions’ 

While there are seven exemptions (including if two or more people perform the work required under the contract in the financial year and each worker performs work that is not de minimis), the commissioner said that there were common “misconceptions” that had been resulting in tax defaults. 

He outlined that these “misconceptions”(often given by licensees, aggregators, and agents to explain why they believe the relevant contract provisions do not apply to their particular circumstances) include:

1. The agent does not provide any services to the licensee who engages the agent but instead provides services to its clients.
2. The agent services its own clients and can take those clients with them if they cease to be an agent for the licensee.
3. The agent sources its own clients and the licensee does not provide “leads” or refer any clients to the agent.
4. The licensee simply provides the regulatory framework required under the Corporations Act that allows the agent to operate its own business.
5. The relationship between licensee and agent is, in effect, a franchise arrangement rather than a provision of services by the agent to the licensee.
6. Payments made by the licensee to the agent is a return of the agent’s money earned by the agent for the provision of financial advice to its clients.
7. The agent does not operate from the licensee’s premises.
8. The commercial relationship between a licensee and an agent does not fit within the definitions in the contractor provisions.
9. The Future of Financial Advice (“FoFA”) amendments to the Corporations Act 2001 (Cth) mean that the relevant contract provisions do not apply to the financial planning industry. 

“These arguments are not accepted by the Chief Commissioner as reasons why the relevant contracts provisions don’t apply,” Mr Smythe wrote in the notice. 

“An Agent is engaged to provide services for or on behalf of a Licensee under an arrangement that meets the definition of a ‘relevant contract’ under the Act.

“It is a general feature of most, if not all relevant contracts that services are provided by both parties to or on behalf of each other. Nor does it matter that the quantity or value of the services performed by an agent who is taken to be an employee exceeds the quantity or value of services performed by the Licensee who is taken to be an employer.” 

The notice went on to provide several examples of how the payroll tax might apply to mortgage broker aggregators, including the following: 

ABC Ltd is a licensee and engages Joe as an AR [authorised representative] for the 2018–19 financial year. Joe worked exclusively as an AR for ABC Ltd during the 2018–19 financial year and none of the exemptions under the relevant contracts provisions applied for the 2018–19 financial year.

ABC Ltd pays upfront commissions to Joe during 2018–19 and also pays trail commissions in subsequent years on the anniversary of the contracts arranged by Joe in accordance with the terms of the contracts.

ABC must include the upfront commissions in its annual payroll tax return for 2018–19 and it must include the trail commission in its annual returns for the 2019–20 and subsequent financial years.

Follow the money, says financial services lawyer Jon Denovan 

According to financial services lawyer Jon Denovan, a partner at Dentons Australia, who specialises in the mortgage industry, the centre of the issue comes down to what the aggregator-broker relationship is defined as. 

“The big question is, does this apply at all? And that depends on how you view the aggregator-broker relationship,” he said. 

“Who is really paying this money [to brokers]? The lenders are; not the aggregator.

“The lender is paying the commissions. So the question is, what is the role of the aggregator? Does the aggregator provide the services to the lender and then retain brokers to carry out those services? Or is the aggregator just providing support services for brokers and lenders?” 

According to the lawyer, the Tax Office is of the view that the lenders retain the aggregator and the aggregator in turn retains the brokers. And because of this, the revenue office views the commission as salary and therefore says that the payroll tax applies. 

However, he suggested that because lenders calculate the commissions for each broker and provide the aggregation groups with a lump sum to distribute, aggregators are simply distributing money to lenders. 

As such, aggregators are taking a cut for the service they provide broker members before passing the commissions through to the broker. He likened this to real estate agents collecting rent from tenants and paying that on to the landlord, minus a service charge. 

“So, I say the correct view is that the brokers are working for the lender and the aggregator is providing support service to that activity,” Mr Denovan said. “This reflects the fact that usually brokers lodge deals direct with lenders albeit using systems supplied by their aggregator.” 

As brokers don’t work exclusively for one particular lender, lenders won’t be subject to payroll tax, he added. 

The Dentons senior consultant flagged that while the payroll tax issue has been a thorn in aggregators’ sides for many years, it “only seems to be New South Wales that’s on this journey to bash up aggregators”.

“It’s a terrible thing [for aggregators], because it has this retrospective effect,” he said. 

The state revenue departments across Australia have long been chasing groups for what they claim to be unpaid payroll tax. 

A similar issue in the medical practitioners’ industry came to a head in Queensland last month after the Queensland Revenue Office had chased payroll tax for doctors. 

Most GPs tend to work under service agreements with practices rather than being directly employed by them. However, the revenue offices had not agreed and had been chasing backdated bills for millions of dollars, which put several practices under threat. 

Following strong engagement with the medical practitioners’ industry, the Queensland Revenue Office (QRO) has now advised it will limit audits on GPs to the FY21–22 and future years. 

[Related: Aggregators under threat as Revenue NSW chases payroll tax]